Investment Highlights

• We maintain BUY on Dialog Group with an unchanged sumof-parts-based (SOP) fair value of RM3.75/share, which reflects a neutral ESG rating of 3 stars. This also implies an FY23F PE of 32x, near its 5-year average of 31x.

• Pending the upcoming results next month, we maintain our forecasts for now. Meanwhile, our recent virtual meeting with management provided the following salient highlights:

• The gradually moderating impact of Covid-19 lockdowns on labour and border restrictions is likely to translate to a stronger 2HFY22. Recall that Dialog’s 1QFY22 net profit slid 4% YoY from higher project expenses, principally raw material/logistics costs driven by global supply chain disruptions and delayed execution.

• The group is still in discussions with clients on recovering some of the Covid-19-related costs incurred in FY21 and 1HFY22, which may include incorporating into the future billings of long-term contracts. In Singapore, Dialog works closely with its clients and partners to mitigate labour constraints via permit and visa approvals for plant maintenance jobs.

• The 85K m3 additional storage of Dialog’s wholly-owned Tanjung Langsat 3 was completed in December 2021, raising the group’s total gross capacity by 1% to 5.1mil cubic metres (m3) and effective net capacity by 3% to 2.6mil m3. The group still has 17 acres of land next to Dialog Terminals 1 & 2, which can accommodate an additional 200K m3 or increase the group’s Tanjung Langsat capacity by 23% to 1.1mil m3.

• The completion of the 430K m3 Pengerang Terminal 5 at Phase 3A in March 2021 has raised the group’s Pengerang gross capacity by 13% to 3.8mil m3 and net capacity by 36% to 1.6mil m3. The storage of this wholly-owned terminal is dedicated for BP Singapore, which has a long-term storage agreement with Dialog.

• Terminal 5 covers up to 50 acres of the 300 acres of Pengerang Phase 3 reclaimed land, which can accommodate another 2mil–2.5mil m3 of tank storage capacity. We understand that the group is currently in negotiations with interested off-takers for the additional tank storage expansion given the recovery in global demand for oil.

• Together with the adjoining buffer land surrounding the Pengerang Phase 3, Dialog still has 500 acres of land which have multi-year development potential, including downstream specialty chemical production in which the group is already discussing with interested multinationals. However, the Covid-19 pandemic has restricted international travel and site inspections, delaying the conclusion of negotiations.

• Pengerang Independent Terminal (PITSB), in which Dialog has an 45.9% effective equity stake, Vopak 44.1% and Johor state 10%, has buffer land in addition to the 150 acres of reclaimed Phase 1 area housing the existing 1.7mil m3 tank storage which cost RM3.2bil. This additional land could accommodate an additional 600K m3 of tank capacity (35% of Phase 1 capacity).

• Likewise, Dialog’s 25%-owned Pengerang Terminal 2 (PT2SB) has additional buffer land which can secure an additional 1mil m3 of tank storage or 77% in addition to the current 1.3mil m3 terminal located on 157 acres of Phase 2 reclaimed land. Recall that the current facilities cost RM6.3bil, in which Dialog undertook EPCC services worth RM5.5bil.

• Additionally, Pengerang LNG (Two) (PLNG2), in which Dialog has a 25% stake, Petronas Gas 65% and Johor state 10%, has invited prospective contractors to submit non-binding expressions of interest (EoI) to utilise a proposed new liquefied natural gas (LNG) tank with a capacity of 160K–260K m3 on a 20-year commercial lease agreement. The EoI aims to enable PLNG2 to assess the feasibility of constructing a third LNG storage tank at its existing and operational Pengerang LNG import facility in Johor. Subject to achieving final investment decision, the new storage tank, which could add 40%–65% to the current PLNG2 capacity of 400K m3, is expected to be completed by 4Q2025 at the earliest.

• Besides tank storage projects, the group is exploring renewable energy solutions such as hydrogen, solar and carbon capture storage as part of its ESG commitments. However, management affirms its commitment to adequate returns of investments above its green agenda. Hence, the group’s participation in a 51:49 joint venture to build, own and operate a RM20mil food-grade recycled polyethylene terephthalate (PET) pellet production facility in Nilai, Negeri Sembilan is expected to have a payback period of 5 years.

• Dialog currently trades at an attractive FY23F PE of 25x, well below its 5-year peak of 40x. We believe Dialog deserves above-peer premium valuations given its long-term recurring cash flow-generating businesses which are further underpinned by the Pengerang development’s multi-year value re-rating bonanza and low net gearing levels.

Source: AmInvest Research - 14 Jan 2022